Today I bought shares of Intel (INTC), the world's largest semiconductor chip maker. The company dominates the market for microprocessors in personal computers (PCs) and continues to be a leader in technological product development.
Intel has produced solid operating results in recent years, with 5-year growth rates of 8.8% for revenue and 22.7% for earnings, high margins, strong cash flows, and good returns on equity. The company's financial position is excellent, with $13.7B in cash, $7.2B in debt, debt/capital of 13.4%, debt/equity of 14.8%, 189x interest coverage, and a current ratio of 2.4. It has an A+ credit rating from S&P and a safety rating of 1 from Value Line.
For a tech company, Intel has a pretty good dividend history. The company has increased its dividend for 9 consecutive years and has a 5-year dividend growth rate of 14.4%. The most recent dividend increase was 7.1%, announced in May. The payout ratio is a modest 38%.
Regarding valuation, I consider Intel to be undervalued with a P/E of 9.6 (its 5-year average P/E is 17.1), P/S of 2.1, and PEG of 0.9. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and a discount rate of 12%, I calculate a fair value over $32 per share, which I think is a reasonable estimate.
Intel's stock price has been beaten down in recent months, reaching a 10-month low today. The stock is trading 20% below its 52-week high set in early May. The drop in stock price reflects the perception that PC sales are on the decline and the recognition that Intel has yet to gain much market share in mobile devices. In addition, earlier this month the company lowered its quarterly revenue outlook. I think the fears about PCs being replaced by tablets and smart phones are overblown. There are many workplaces (such as my own) that will likely continue using PCs for many years, in part because they are much more powerful than mobile devices. I also think the concerns about Intel's lack of presence in the mobile market are overdone. To put a positive spin on it, given that the company has yet to gain much market share in the area, there is plenty of room for future growth. Intel invests heavily in R&D and has top-notch fabrication facilities, so I think it is only a matter of time before they make significant inroads in the mobile market.
I bought 65 shares of INTC at the price of $22.62 per share, giving me a 3.96% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $14.63, which will add a total of $58.52 to my annual dividend income. Intel is now the 23rd stock in my portfolio and my first new position since April. Even though I am wary of the technology sector in general, Intel is a solid, profitable company that I feel comfortable having in my portfolio. For that reason, I would consider increasing my position on a further decline in the stock price.
I am pleased that I was able to find a second great opportunity to deploy cash this month (the first being my purchase of NSC last week). I think I am getting better at appreciating that it is a "market of stocks" rather than a stock market, so regardless of what the broader market is doing, it is best to stay focused on finding individual dividend growth stocks that are available at attractive valuations.